StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Why Public Works Are Poor Stimulus and Why We Still Need Them

17 Oct 2010
Posted by Bruce Bartlett
For some odd reason, it seems to be news that the public works projects financed by the 2009 stimulus bill have been very slow to come online because there were few shovel-ready projects in the pipeline that needed only funding to get started. Everyone appears to be treating this statement by President Obama in today’s New York Times Magazine as a revelation: “There’s no such thing as shovel-ready projects.”
 
Indeed, some are reacting as if it is a scandal that Obama apparently had this insight a year ago and disclosed it off-the-record to Times columnist David Brooks.
 
If this is a scandal, then it may be the most idiotic one I have seen in a long time. Of course there were few if any shovel-ready projects. Economists have known this for decades and it is an important reason why public works are a poor means of stimulating short-run growth. By the time the projects come online most recessions are long over. Here is what I wrote in The Public Interest almost 20 years ago, summarizing a 1980 Office of Management and Budget study of countercyclical public works:
 
            ● Public works programs cannot be triggered and targeted in a sufficiently timely manner to compensate for cyclical fluctuations in unemployment and economic activity.
 
            ● Even if it were possible to properly time a countercyclical program, the time it takes to construct public works would lead to a significant overlap of job generation and economic stimulus with periods of economic recovery.
 
            ● Public works programs have had a minimal impact on the unemployed. This is partly because the programs are not labor-intensive, and partly because many of the jobs created require skills the unemployed do not have.
 
            ● The duration of employment for individual workers is too short to provide meaningful economic relief, to maintain skills and work habits, or to provide on-the-job training.
 
            ● Public works are extremely costly. The cost of generating a construction job for one year ranges from $70,000 to $198,000. [Note: these are 1980 dollars; adjusted for inflation, it would be $185,000 to $525,000 per job.]
 
These conclusions weren’t even new in 1980. The long lead time for public works startups had been documented in the academic literature long before that. See, for example, Sherman Maisel, “Timing and Flexibility of a Public Works Program,” Review of Economics and Statistics (May 1949), pp. 147-152. Indeed, John Maynard Keynes himself expressed skepticism about using public works for countercyclical purposes. As he wrote in 1942:
 
Organised public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle. [Collected Writings, vol. 27, p. 122.]
 
Because I knew the history of public works and countercyclical policy, I warned anyone who would listen that it was going to take a long time for public works programs to stimulate growth and reduce unemployment. Here’s what I wrote in a January 9, 2009 Forbes column:
 
Of course, Obama isn't only relying on tax policy to stimulate growth; he has plans to increase spending on public works as well. But this may not do much to create jobs this year. Despite claims by the Conference of Mayors and the transportation lobby that there is as much as $96 billion in construction "ready to go," the fact is that it takes a long time before meaningful numbers of workers can be hired for such projects.
 
As a recent Congressional Budget Office study explains, "Practically speaking ... public works involve long start-up lags. ... Even those that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy."
 
Here’s what I wrote in a January 23, 2009 column:
 
The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year. But if much of the stimulus doesn't come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. According to the Congressional Budget Office, only a fraction of proposed infrastructure spending can be spent before October of next year; the bulk would come long after.
 
And here is what I said in a June 26, 2009 column:
 
The problem is that Obama was always much too optimistic about how quickly stimulus spending could have an effect. As I warned in a January column, it takes far more time for it to impact the economy than most people think. Moreover, not all government spending is necessarily stimulative, and the parts of the stimulus package that provide real stimulus are among the slowest to come online.
 
Congressional Budget Office Director Douglas Elmendorf recently presented a report to the International Monetary Fund in which he walked through some of the problems with implementing the stimulus program.
 
First of all, 60% of the stimulus package was never going to have much of a stimulative effect. These were programs like extending unemployment benefits and tax credits with no incentive effects that may have been justified on the merits, but don't really do anything to increase growth or reduce unemployment.
 
For a program to be stimulative, it must bring forth economic activity that otherwise would not have taken place. The classic example is public works. When a new road or bridge is built, construction companies have to purchase concrete, steel and other materials that create business for other companies. They also employ workers that otherwise would not be working, paying them wages that they will spend, producing jobs and incomes for other workers.
 
If this works the way it is supposed to, stimulus spending has a multiplier effect throughout the economy. A Council of Economic Advisers study estimated that government purchases of goods and services raise the gross domestic product by $1.57 for every $1 spent. By contrast, tax credits and income transfers are much less stimulative, raising GDP by considerably less than $1 for every $1 rise in the deficit.
 
Since 60% of the stimulus package had a multiplier effect of less than one, only 40% of the package went to programs like public works that have a high multiplier. Moreover, the programs with a low multiplier were the fastest ones to implement; those with a high multiplier take much more time to come online. According to Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending.
 
Even at the end of fiscal year 2010, we will have spent only 47% of the highly stimulative spending. By the end of fiscal year 2011, more than a quarter of the stimulative spending will still remain unspent.
 
The CBO bases this estimate on many years of experience with various types of government programs. Increases in defense spending are the quickest to stimulate because 65% of the money is usually spent in the first year, rising to 88% the second year and 96% in the third. By contrast, only 27% of highway spending is spent the first year, rising to 68% the second year and 84% the third. Spending on water projects is even slower to come online, with only 4% spent the first year, rising to 24% the second year and 54% the third.
 
The reason is simple. Much of what the Defense Department buys involves things that also have civilian uses. In effect, it is buying off the shelf so spending can be done quickly. But to build a new highway or dam is much more complicated. Plans have to be drawn up, land acquired, environmental impact statements prepared, public comments solicited, political and other objections dealt with, contracts written and put out for bid, etc. This takes years and years.
 
Of course, there were a few shovel-ready projects for which all the preliminary work had been done that only needed money to start work. But there were far fewer of these projects than generally believed. Moreover, as Popular Mechanics reported, many of those that were ready to go were those that had been shelved because they were outdated or had other flaws.
 
Even the simplest public works projects such as road repaving take months to get moving from the time a federal check arrives. And in the short run such small projects have very little stimulative potential because state and local governments will simply use the workers and materials they already have on hand to do the work.
 
In conclusion, it is surprising that the lack of shovel-ready projects or the slow pace of public works spending is a revelation to anyone. Obama’s statement is simply an admission of the obvious. I have no doubt that Larry Summers, Christie Romer and Peter Orszag all told him that public works were not likely to provide much short-term stimulus. Their main value is that public goods stimulate long-term growth and the best time to produce them is when the private sector has a lot of idle resources and they can be financed at low interest rates. These are still very good reasons to undertake public works now before the economy recovers, interest rates rise and the private sector competes for the resources necessary for large public works projects.
 

It was no surpise, and it shouldn't have been to the Media eithe

Yet they played along with Obama and the rest of the Democrats when they pretended they could fund hundreds of billions of dollars of "shovel ready projects".

They lied, and the American people have figured it out.

In November 2, they are gone. Too bad we can't kick out Obama just as quickly.


The problem for devout

The problem for devout Keynsians like you is that the multiplier does not exist. One has to be deranged to believe that it does. The only way to get a multiplier effect is to put spendable cash in the hands of the consumer. There ain't no government program that will do that.


Frankly, I really don't much

Frankly, I really don't much care about multipliers, equivalency, crowding out, time lags and all the rest that seem to occupy academic discussion.

I care about rebuilding America's legacy infrastructures. And in case few have noticed, and apparently few have, the amount of effort we need to organize is in the many trillions of dollars. And yes, Martha, that creates a ton of jobs.

That it can't happen by next Friday is totally irrelevant. All that is relevant is that it absolutely must happen. That we don't 'get on with it' is the real dynamic that must be investigated. It's obvious to me what's NOT happening, but it's not obvious precisely why.

I think we have intellectual confusion on one hand and on the other hand a classic case of national oligopolies almost unanimously opposed to any status quo change. So we all collectively sit on the throne reading the Economist.


In a "normal" cycle, the

In a "normal" cycle, the point that public works projects have long lead-times bites pretty hard. In this cycle, I don't see why long lead-times present a problem. We expect output to run below potential well past the point that the growth in potential is slowed, easily long enough that infrastructure repair efforts could take hold and produce growth. Repair has less need for planning, environmental studies, engineering studies and the like, and we surely need it. It's just shameful to allow existing public works to crumble while squabbling over whether we need to build new ones.


Exactly

Shovel-ready is simply not a critical criterion for stimulus projects in this particular economic slowdown. Here we are 18 months later and still in great need of the stimulus value that infrastructure construction would provide.


Funny

How the "cut spending" crowd seems to the most vocal on: roads, libraries, education, or anything that isn't defense related.

I was watching the libertarian candidate for NY governor last night and the first type of public "wasteful" spending he goes after? The president of the NY public library of course, complaining how this person makes "$600,000 a year in salary. Now I know the library is big [failed to mention '2nd largest in N. America], but that seems a bit much."

Here is the background for the new NY library president: http://www.nypl.org/press/press-release/2010/10/06/new-york-public-libra...

Compare his responsibilities and background to any multi-national CEO and I think you'll consider that amount of pay reasonable. If you're outraged, your outrage is selective and silly seeing as Wall St. remains awash in our cash paying out huge bonuses to "attract the best people."

You Cut-spending folks have a great day. I'm on my way to my publicly funded college using my Pell grants and 9/11 GI Bill.

If you make less than $250,000 a year, don't worry, I'll still be voting in your best interests, even if you don't realize it.


You *might* be right about

You *might* be right about the salary of the president of the NY public library, *if* (and it's a big *if), he is held to similar standards of performance as a corporate CEO.

Is he diligent in cutting waste and giving the library's owners (the local taxpayers) good value for their tax dollars invested? Or is the library budget continually growning despite cutting services?

If it is the latter, then the $600k salary *is* waste.

You've certainly got the liberal attitude down pat:

"I know what's better for you than you do, so sit down, shut up and *like* it."


Before you responded

you should have read the article. It says that the NYPL faced significant funding cuts this year with the number of visitors at an all-time high. So he is improving the taxpayers' value.

You've certainly got the conservative attitude down pat:

"I know I'm right so I don't need pesky facts"


Jobs created by different types of spending

Education spending and specific form of infrastructure spending, mass transit, are very effective at creating jobs though. See

http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/PERI_IPS...

The key data is summarized in Table 1 on page 7, which estimates that education and mass transit spending provide about double the number of jobs of defense spending or tax cuts.


$1 million per job

Intel is spending $8 billion to create 1000 manufacturing jobs and 8000 construction jobs. That's close to $1 million per job.

http://www.businessweek.com/news/2010-10-19/intel-to-spend-up-to-8-billi...


And your point is ... ?

Presuming you're trying to make a statement that private industry can spend huge amounts for few jobs like government, your comparison fails on several points:

1. Intel isn't spending money taken by people by threat of force, like taxes are.

2. Intel's shareholders expect an appropriate return for this investment. When have you held the government to the same standard.

3. If an appropriate return doesn't materialize, Intel's executive officers can be and expect to be fired for making a poor decision. Are you holding the government to the same standard?


Tripple the return...or nothing at all

It depends on what you consider return on investment.

To me the mere fact that many of these projects will have to be done at some point and in the long run might be much more expensive to do for a multitude of reasons is one form of return on investment.

The second is that they in fact create a long term increase in employment and eventually revenue. I feel they will, just not in the manner they were sold.

The third potential return is the possibility that one or many of these projects (like work US bridges)find or even unknowingly correct a flaw that could have cost many more millions of dollars due to a failure. Hard to quantify the savings of not losings lives and needed infrastructure, but we can always find a way to come up with a figure when we do lose them.


Considering Where We Are Now

Would support some massive infrastructure spending to create/strengthen the "recovery" or do you think by the time they would come on line--say in 2012 & 13--that we would be out of this mess.




Recent comments


Advertising


Order from Amazon


Copyright

Creative Commons LicenseThe content of CapitalGainsandGames.com is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.